On Irans universal cash subsidies Massoud Karshenas (SOAS) and Hamid - - PowerPoint PPT Presentation

On Iran’s universal cash subsidies

Massoud Karshenas (SOAS) and Hamid Tabatabai (Ex-ILO) LSE Conference – London – 20 February 2018

Purpose

To present Iran’s nationwide cash subsidy scheme (genesis, impact, prospects and lessons).

 Launched in Dec 2010, the scheme consists of paying

all Iranians a fixed amount of cash, 455,000 rials / person, each month (at the time eq. to $45 / person; 2/3 minimum wage / household of average size)

 Cash subsidy is not a Universal Basic Income (UBI)

 Shared features: paid by the government, universal,

unconditional, regular, same amount to all citizens.

 Main differences: not meant as UBI, not sufficient to

cover basics, paid to HH head for all HH members.

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Genesis (1): Subsidy reform

Scheme devised as compensation to win popular support for reform of massive price subsidies.

 Subsidised items: Fuel, electricity, water, bread  Pre-reform give-away prices: petrol 10 US cents / litre;

diesel under 2 cents; ...

 Annual subsidy bill: $100 billion (mostly on energy)  Subsidy system being:

 Inefficient: wasteful consumption, pollution, smuggling to

neighbouring countries, etc.

 Costly: rapidly rising bill  Unfair: 70% going to richest 30% of the population

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Genesis (2): Cash compensation

Grand idea: Replacing price subsidies with cash subsidies to HHs, enterprises, infrastructure dev.

 Initial plan: Target 70% of population (below mean

national income) using demographics, education, income, car & house ownership, bank loans!

 HH (mis)classifications caused widespread discontent

 Targeting abandoned in favour of universality (with plea to the well-off to voluntarily abstain!)

 Coverage eventually rose to a peak of 96% of

population (74 million at the time)

 Law passed in 2010; Implemented in Dec. 2010

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Impact (1)

Methodological difficulties in assessing impact of a universal programme (lack of control groups, many intervening factors, …).

Easily discernible effects:

 Established right to universal cash benefits  Established a nationwide constituency that resists roll-back  Novel funding mechanism (higher energy prices rather than government

budget, in theory!)

 Spread banking services throughout the country (monthly cash subsidies are

deposited automatically in bank account of HH heads)

 Roll-out handled smoothly (confirming implementation capacity)  Loss of 70% of purchasing power over the 7 years of programme due to

inflation (no change in nominal transfer, see Table)

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Trends in cash subsidy per person: nominal and real indices, 2010-2017

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Year Urban CPI (2016=100) Cash subsidy nominal index (fixed amount throughout) Cash subsidy real index (2010 =100) 2010 33.2 100.0 100.0 2011 40.3 100.0 82.4 2012 52.6 100.0 63.1 2013 70.9 100.0 46.8 2014 81.9 100.0 40.5 2015 91.7 100.0 36.2 2016 100.0 100.0 33.2 2017 110.0 100.0 30.2

Impact (2)

Some tentative conclusions based on available studies:

More analytical impacts:

 Energy consumption: Only short term impact (the reform process

weakened over time)

 Poverty: Most likely positive  Income distribution: Most likely positive  labour supply (conflicting accounts)  Presumed pressure on government budget, already battered by

sanctions, as transfer amount had been set too high relative to extra revenues from higher prices (for both political and practical reasons)

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Prospects (1)

Although very popular, political class and experts generally against the scheme.

Among reasons advanced:

 Drain on government resources  Preferred alternatives for use of resources (health, education, infrastructure,

etc.)

 Little justification for universality (why pay the rich?)  Promotes a culture of hand-outs  Ex-president Ahmadinejad (scheme’s initiator) now politically ostracised

“Solution” sought: Target “the needy”, with possibly larger transfer amount. “Solution” in practice: Inflation (70% loss of transfer value in 7 years)

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Prospects (2)

Lukewarm attempts at targeting so far

 Dropping 5 million out of 75 million, but 1.5 million (30%)

restored after complaint

 In 2016, 840,000 dropped but 60% restored  More recent exclusions beset with more errors  Further exclusions may affect over 30 million  Criteria for further exclusions: Not specified yet, but

confusing leaks and confused discussion

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Lessons

What accounts for the emergence of world’s largest universal cash transfer scheme?

 Not labelled as UBI (a concept virtually unknown in Iran)  Identified as part of solution of a widely acknowledged

problem (price subsidies)

 Novelty of funding mechanism  Systematic preparation and information dissemination  Weakening the scheme: Poor arithmetic, turbulent environment

(international sanctions), exceedingly politicised

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Thank you

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